The rupee's dollar dance

The rupee has been depreciating against the dollar for some time now. The Reserve Bank of India is said to have intervened and sold dollars to arrest the slide.

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MG Arun

August 24, 2018

ISSUE DATE: September 3, 2018

UPDATED: August 25, 2018 12:20 IST

Illustration by Tanmoy Chakraborty

Any fall in the rupee not only impacts the economy, but causes a stir in political circles as well. The rupee's slide below the psychological mark of 70 to the US dollar on August 14 prompted Congress president Rahul Gandhi to tweet, "The Indian Rupee just gave the Supreme Leader, a vote of NO confidence, crashing to a historic low." It was an indirect dig at Prime Minister Narendra Modi, who, during the 2014 general election campaign, had attacked the UPA government as the rupee crashed then. The previous biggest single-day fall for the rupee was 148 paise in August 2013. The latest fall was prompted by global factors.

The rupee fell to a new historic low of 70.32 to a dollar on August 16. "The rupee fall is a temporary phenomenon," says Madan Sabnavis, chief economist with Care Ratings. He adds that the fall is more of an associated effect of the Turkish crisis and the US-China trade war, and all currencies are being battered. US sanctions against Turkey caused a fall in the Turkish lira, sending stock markets and currencies across the world into a tailspin. The rupee gained some ground in the following days, closing at 69.83 on August 20.

The rupee has been depreciating against the dollar for some time now. The Reserve Bank of India is said to have intervened and sold dollars to arrest the slide. But the continuing uncertainty in the global markets, high oil prices and high capital outflows from the currency markets are bound to keep the rupee under pressure. According to Tushar Pradhan, chief investment officer at HSBC Global Asset Management, India, "While the Indian rupee is the worst-performing in the (Asian) region (down about 8.5 per cent) this year, it compares well against other emerging markets, such as Russia (down 13.7 per cent), Brazil (down 14.8 per cent), Argentina (down 37.8 per cent) and Turkey (down 42 per cent)." He adds that the weakness is more from the dollar strengthening than any inherent weakness in the rupee.

Experts see the rupee stabilising in the future. "While the present imbroglio in the political space will cause volatility, depending on the way the dollar-lira value moves, it may be expected that a value of Rs 69 to a dollar should be the equilibrium," says a Care Ratings report. A depreciated rupee helps exporters in a big way. India's trade deficit, or the higher cost of imports compared to revenues from exports, widened the most in five years. The trade deficit expanded to $18 billion in July, from $16.6 billion in June, partly due to the higher oil import bill. A weak rupee will help shrink the deficit, as exporters get more rupees against their overseas receivables. On the flip side, the rupee's fall will be negative for big importers, such as oil companies, as their profits come under pressure.

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